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PROJECT FINANCE
Unit – II: Market and Technical Analysis
Once project idea are generated and screened, they are evaluated to test their marketability, technical
feasibility and cost considerations. Market and Demand Analysis provides a detailed analysis of all
market condition and helps in estimating future revenue from the project. Technical analysis
provides an assessment of all technical aspects of the project idea and helps in estimating the
operating cost of the project.

MARKET AND DEMAND ANALYSIS:

Under market and demand analysis estimations are made regarding the size of the potential market,
patterns of consumption, level of competition, market composition, aggregate demand for a product
or service for a particular period, variation in demand etc.

Objective of Market and Demand Analysis is to see if the idea is feasible from the point of view of
market potential.

To fulfill this objective, a project manager should carefully study the market potential for a given
project idea, by conducting various market and demand analysis activities. These activities are as
follows:
 Objective Specification
 Collection of Data
 Market Survey
 Market Description
 Demand Forecasting
 Market Planning

Objective Specification

Collection of Data Market Survey

Market Description Demand Forecasting

MARKET PALANNING

“Diagram showing - How Market and Demand Analysis is carried out”

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1. Objective Specification:
While doing a formal study (investigation) regarding market and demand it is necessary to decide
the objectives of the study, so that all the activities and efforts can be directed towards same
direction. Once the objectives are decided all the activities must be carried out in such a way, that
it achieve the decided objective in any way.

For example: If the objective is to forecast the long-term demand to see the feasibility of project,
the questions in survey should be framed in such a which focuses on future need and not on
current need.

2. Collection of Data:
The project manager collects a lot of data from all the possible sources for investigation. Broadly,
data is of two types:
 Primary Data
 Secondary Data

PRIMARY DATA is the data that is collected for a specific purpose and for the first time. It can
be obtained from sources both internal and external to the organization. Internal primary data
is obtained from past and current sales of the firm. External primary data is obtained from the
opinions of the dealers, feedback of the sales personnel and consumers. Survey Methods and
Experimental Methods are ideal for gathering primary data.

Survey Method of primary data collection includes personal interviews, telephonic interviews
and mail survey with customers or middlemen. Experimental Method includes product testing
(product performance done on limited scale), psychological techniques (test of subconscious
emotions of customers) and consumer panel technique (interviewing the same group of
consumers on permanent basis).

Merit – Primary Data provides problem specific and accurate data. Demerit – But collection of
primary data requires more time and costs.

SECONDARY DATA is the data that is already available but might have been collected for
some other purpose or by some other institutions. Secondary data is compiled by the government,
non-profit organizations, commercial organizations and some social welfare institutions. Some of
the sources of secondary data are as follows:
 Central Statistical Organization (CSO)
 Census of India
 Center for Monitoring Indian Economy (CMIE)
 Market Analysis and Research Group (MARG)
 Journal of Federation of Indian Chambers of Commerce and Industries (FICCI)
 Research theses available in the universities and research organization etc.

Merit – Secondary data is readily available and economical. Demerit – Secondary data is
collected by some other organizations for their own purpose. A doubt on accuracy, reliability and
relevancy of such data always remains.
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3. Market Survey:
Market survey is a technique that is aimed at gathering all possible information (primary data) by
conducting interviews.

Since it is not possible to interview the entire population of the market, sample survey is a good
method to assess the market information. The project manager conducts the sample survey by
choosing a sample that best represents the characteristics of the population (whole market).

A market survey is useful in determining the total market demand, demand growth rate in
different segments of the market, understanding the inner motives of the customers and
measuring the unsatisfied need of the customers.

The following are the steps in a sample survey:

 Defining the Target Market
 Selecting the Sample
 Developing the Questionnaire
 Training the Surveyors
 Recording the Information
 Interpreting the Information

Step I - Defining the Target Market: The project manager defines the target market of a project
idea in terms of market population. He then divides the population into the various segments
based on the buyer characteristics. For example: the various segments of customers for a power
project are household consumers, commercial consumers, industries and all state/central
government offices.

Step II – Selecting the Sample: The project manager carefully selects a sample that represents
all the characteristics of the population from various segments. The sample should not be very
small as it cannot represent the characteristics of the population. In the same way, the sample
should not be large, as it is not economical for the firm conducting the survey.

Step III - Developing the Questionnaire: A questionnaire is a formalized set of questions for
generating information. The questions can be structured or unstructured or a combination of both,
depending on the requirement. Structured question are question followed by a fixed number of
choices (Objective). Unstructured questions required the respondent to give descriptive
answers.

Step IV: Training the Surveyors: Project Manger should be careful while selecting the market
surveyors who actually conduct the survey. Project Manager must ensure that these surveyors are
able to tap the hidden interests of the customers. Proper training of the surveyors will ensure
good results.

Step V: Recording the Information: The information obtained from the survey should be
recorded for future use. Project manager does editing and tabulating of the information recorded.

Step VI: Interpreting the Information: The recorded data is interpreted by analyzing it by using
some standard statistical techniques such as Chi-Square Test, correlation, regression, ANOVA
analysis etc.
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4. Market Description:
Based on the information obtained from secondary data and market survey, the project manager
try to draw the picture of whole market like study of different segments in market, price trends,
consumer’s interest, methods of distribution prevalent in market, sales promotion tools, level of
competition etc.

i. Competition in Market: Competition can be said as a measure of profitability of an

industry. High level of competition generally reduces the profitability of industry. Therefore,
analyzing and study the degree of competition in the market is become important. Under this
different factors analyzed are Number of Players in Market, their relative market share,
degree of rivalry amongst them etc.

ii. Study of Market Segments: The project manager can better study the market by dividing it
into various segments as per nature of the product, type of customers or geographical
location. For example: in case of power projects, the total demand can be divided into
domestic consumers demand and industrial consumers demand. Similarly, demand in urban
and rural areas.

iii. Price: The project manager collects the price statistics of the proposed project idea to
understand the market fluctuation and the changes of price of the product. This allows him to
arrive at the best price for his product.

iv. Methods of Distribution: The ‘reach’ of a product or service plays an important role in
determining the success of the product. As different products require different type of reach,
therefore, different methods of distribution should be studies and best one should be selected.

v. Sales Promotion: The project manager should study the existing sales promotion techniques
in the market and should adopt techniques after considering the characteristics of the market,
nature of product and the distribution channel. Discounts, free gifts, coupons are some of the
sales promotion techniques.

vi. Consumers Interest: The project idea is evaluated on the basis of the consumer’s
demographic, sociological, cultural interests and values. A project idea that goes against these
interests and values should not be taken up.

5. Demand Forecasting:
“Demand Forecasting is the art of predicting demand for a product or a service at some future
date on the basis of certain present and past behavior patterns of some related events”. In other
words, it is not simple guessing of future demand, but it refers to estimating scientifically on the
basis of certain facts.

CHARACTERISTICS (FEATURES OR CRITERIA) OF A GOOD DEMAND FORECASTING:

1. Accuracy: As all the future business decisions have to be based on demand forecast,
therefore, its accuracy is of prime importance. If forecast will not be accurate all decision
based upon the forecast like production scheduling, factors planning etc. will be wrong and
hit the profitability of business.

2. Simplicity: Methods used for forecasting and its presentation should be simple to
understand, so that management can have confidence upon it and proper results can be
interpreted.
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3. Economy: Cost of demand forecasting should be reasonable or justified. In other words, cost
of forecasting should always be less than the profits it will provide, else there will be no
benefit.

4. Timeliness: Methods used for forecasting should be quick in providing results so that results
provided by them can be used in business decision-making. If it will take too much time then
results will be of no use.

5. Availability: Only such methods should be used for forecasting, for whom data can be easily
available, else forecasting will not complete or will be false.

Methods of Demand Forecasting:

Although there is no easy method or simple formula which enables an individual or a firm to
predict the future with certainty, but the firm has to apply a proper mix of opinion, scientific and
judgmental methods, in order to correctly predict the future demand for a product. The following
are commonly available techniques or methods of demand forecasting:

1. Survey of Buyer’s Intentions: This is also known as ‘complete enumeration method’. The
most direct method of estimating demand is to ask customers what they are planning to buy
in the coming time period. Thus in this methods the reliability of forecasting is based on the
customers estimates, but they should be used cautiously with the seller’s own judgment.
Merit: This method is useful for industrial sales, which generally have sure future plans.
Demerit: Household customer may themselves misjudge their requirements.

2. Collective Opinion Method: Under this method, salesmen of the firm are required to
estimate expected sales in their respective territories. The logic of this method is that
salesmen being closest to the customers are likely to have the most intimate feel of the
market. These estimates of salesmen are consolidated to find out the total estimated sales.
These estimates are further examined in the light of factors like biasness of salesmen,
proposed change in selling prices, change in product design, advertising, expected change in
external environment like competition, income of consumers, population etc. Merits: This
method is simple. It is based on information of persons closest to consumers. Demerit:
Personal opinion of salesmen can influence the result.

3. Expert Opinion Method: This method is also known as ‘delfi method’ of investigation. In
this method instead of depending upon the opinions of buyers and salesmen, firms can obtain
views of the specialists or experts in their respective fields. Opinions of different experts are
then exchanged among the various experts and their reactions are taken and analyzed. The
process goes on until some unanimity is arrived among all the experts. Merits: This method
is very quick and cheaper. This is only method available in case data is not available.
Demerit: Some time experts may not reach at unanimity.

4. Controlled Experiments: Under this method, an effort is made to vary separately certain
determinants of demands which can be manipulated, for example, price, advertising etc. and
conduct the experiments by changing some variables and assuming the other as constant.
Thus the effects of demand determinants like price, advertisement, packaging etc. on sales
can be assessed by either varying them over different markets or by varying hem over
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different time periods. It should be noted that however, that the market divisions here must
be homogeneous with regard to income, tastes etc. Merits: This method may provide very
good results, if done successfully, because it is based on direct reaction of customers.
Demerits: It is expensive and time consuming.

5. Study of General Economic Environment: The various methods suggested are related with
product concerned and internal factors affecting it. But all these forecast cannot be accurate if
there is any change in economic condition of a country or a particular market. Therefore, in
order to find out these changes an eye should be kept on certain economic indicators. Like
heavy orders for capital goods in an economy shows the future prosperity of that economy.
Similarly, heavy household electrical connections confirm the fact of heavy construction
work going on. Other indicators like national income, per capita income, population growth
etc. helps in refining the demand forecast.

6. Statistical Methods: Statistical method has proved to be very useful in forecasting demand.
The important statistical methods of demand forecasting are:

a. Trend Projection Method: A firm, which has accumulated considerable data on sale
pertaining to different time periods, can use this method. Such data is plotted on a graph
to find out the trend in sales and on the basis of current trend future demand is forecasted.
This method is useful only when there is no significant change in determinants of a
demand of a particular product.

b. Graphical Method: Under this method sales data as well as data related to factors
affecting demand is plotted on a graph paper and a graphical relation is find out between
them. Graph of factors is further drawn for coming years and on the basis of prior judged
relation future sales graph is also drawn.

c. Regression Analysis: Under this method a relationship is established between quantity

demanded (dependent variable) and independent variables such as income, price of the
goods, prices of the related goods etc. that how quantity demanded behaves when these
independent variables get changed. By understanding that relation and its degree an
equation is formed to find out the effect of changes in variables (independent) like
income, price of the goods, prices of the related goods etc. on the demand of goods. That
equation is always used to find out the quantity demanded in future based on the changes
in independent variables.

6. Market Planning:
This step under Market and Demand Analysis is not related to actual analysis, but related to
market plans of new firm (if idea under consideration is selected). Under this step, four P’s of
marketing – product, price, place and promotion should be well designed (on the basis of analysis
which has been done in above 5 points) to achieve the expected level of market penetration.
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TECHNICAL ANALYSIS

In today’s time, it is very important to choose the right technology as only after that a business will
be able to stiff competition in the market. Moreover technical decision (related to technology) once
taken can not be revered, as it involves very high fixed investments. When we say appropriated
technology, it means a technology which can produce a right quality product, at right cost of
production. At the same time initial cost of setting up the plant should be minimum and within
budget.

Technical analysis of a project idea includes an in-depth study of all technical aspects related to basis
manufacturing operations, detailed design, assembling etc. A competent team of technical experts or
reputed technical consultants evaluate the technical aspects of the project.

Objective of Technical Analysis:

Primary Objective:
 First and foremost important objective of technical analysis is to see whether the project idea is
feasible or not from technical point-of-view or not.
Secondary Objectives:
 To find out the most optimal formulation of the project technology, size, location etc.
 To find out the Cost of Project, so that profitability can be calculated

Activities in Technical Analysis:

Various activities performed to check the project idea on technical ground are as follows:
1. Technology Selection
2. Material and Utilities Input Requirement
3. Flexibility in Product Mix
4. Plant Capacity
5. Location and Site for the Project
6. Machinery & Equipments

1. Technology Selection
For manufacturing a product or service often two or more alternative technologies are available.
For example: there are many technologies for producing cement, steel, paper etc. Therefore,
problem arises for choice of appropriate technology. This choice depends on various factors.
Some of them are as follows:

Plant Capacity: Choice of technology depends on plant capacity, as we can not choose a very
high technology (like expensive fully automatic plant) for a small size of plant. Therefore, we
should choose technology as per plant capacity.

Material and Utilities Input Requirement: Choice of technology also depends on the
availability of inputs for various alternative technologies under consideration. We can not adopt a
technology for which inputs (like raw-material and other consumables) will not be available. At
the same time, we should adopt the technology, which can use locally available inputs.

Investment Outlay and Production Cost: While selecting technology, initial investment outlay
and its cost of production should be studied. Such technology should be adopted which minimize
the production cost and at the same time investment remains in budget of the promoters.
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Use by Other Units: The technology adopted must be proved successful, by the units already
using it.

Flexibility in Product Mix: Selected technology should be able to produce different variants of a
product.

Latest Developments: The technology adopted must be based on the latest developments in
order to ensure the technology does not obsolete in near future.

Appropriateness of Technology: Appropriate technology refers to those methods of production

which are suitable to local economic, social and cultural conditions.

2. Material and Utilities Input Requirement:

An important aspect of technical analysis is concerned with defining the materials and utilities
requirement, with their detailed features and searching for availability of these materials and
utilities. It has a long bearing on the profitability of the firm. Inputs can be categorized in four
categories.

Raw-Materials: It includes the Agriculture products, Mineral Products and live stock used as a
raw-material, to be converted in some other finished goods. Various aspects to be looked upon
are the future availability of such products (like area under cultivation), government regulations,
deposits of minerals etc.

Processed Industrial Material and Components: It includes base metals, semi-processed

materials, parts and components, which represent important inputs for number of industries.
Various aspects to be looked are availability, dependency, past trend in prices and expected
future trend etc.

Auxiliary Materials and Factory Supplies: In addition to the basic raw-material and processed
industrial materials, a manufacturing project requires various auxiliary materials and factory
consumables like chemicals, additives, packaging materials, oils, grease, cleaning materials etc.
Requirement and availability of such inputs should also be considered.

Utilities: These are different services like power, water, telephone etc. which works as a
facilitator for production activities. Since the successful operation of a project critically depends
on the adequate availability of such utilities, various factors like adequacy, cost etc. should be
considered.

3. Product Mix Flexibility:

Another area to be analyzed under the technical analysis is flexibility of technology and plant
regarding product mix. As most of the items are produced in different sizes, colors, quality aimed
at satisfying a broad range of customers. For example a ready made shirt manufacturer is
required to made different sizes of shirt, that too of different design. He is also expected to
change its design time to time.

Therefore, it is also important to see whether proposed project idea (and all its technical aspects)
is flexible enough to produce different variants of product or not.
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4. Plant Capacity:
Plant capacity (also referred as Production Capacity) refers to the volume or number of units that
can be manufactured during a given period by a plant. Some factors having a bearing on the
capacity decision are as follows:

Technological Requirement: For most of the high technology plants a minimum economic size
is determined. Below which cost of production is very high. For example in case of latest cement
plants, minimum capacity should be 300 tones per day.

Input Constraints: Some times there may be constraints on the availability of certain inputs,
power supply, foreign exchange etc., because of which a particular plant capacity can not be
installed, even if market potential is very high.

Market Condition: The anticipated market for the product has an important bearing on the plant
capacity. In a strong market condition plant with a higher capacity is suggested (even if current
demand is low, but future prospects are good).

Investment Cost & Resources of Firm: cost of plant and firms investment capacity is also an
important factor in deciding the plant capacity.

5. Location & Site Selection:

Location refers to broad area like a city, an industrial zone etc., whereas site refers to a specific
piece of land where the plant would be set-up. Various considerations while analyzing location
& site are as follows:

Nearness to Raw Material & Market: Different location must be analyzed on the basis of
nearness to raw-material source & market. As location should be such which minimizes total cost
(i.e. transportation cost or raw-material plus cost of distribution of final product in market).

Availability of Infrastructure: Other factors while analyzing the location choice are availability
of power, transportation, water and communication. As all these factors are basic needs for any
business.

Labour Situation: Different factors regarding the availability of labour like type of available
labour, its cost, its productivity, unionism etc. should also be investigated.’

Government Policies: Some government may prohibit a particular location for a specified type
of business. Similarly, government some times promotes setting up of a business in backward
areas to promote the area and provide some benefit in form of tax exemption etc. reducing cost of
production.

Other Factors: Other factors like climate condition, law & order situation, general living
condition also affect the location selection decision.

6. Machinery & Equipments:

Technical Analysis of a project idea should include the study of required machinery and
equipment to run the project. The machinery and technology required depends on the plant
capacity and type of technology selected. The project manager should study constraints like
transportation of heavy equipment, import of foreign machinery, and after sales service from the
sellers of the equipment, before selecting the necessary machinery or equipment.